Q&A: Trade Tensions Between the U.S. and China

Chinese President Hu Jintao listens to Microsoft Chairman Bill Gates during a visit to Redmond, Wash

hide captionChinese President Hu Jintao listens to Microsoft Chairman Bill Gates during a visit to Redmond, Wash., April 18, 2006. Critics want increased enforcement of copyrights in China, where pirated software is readily and easily available.

Andy Clark/AFP/Getty Images

There are strong constituencies demanding that President Bush get tough on China during Thursday's summit with President Hu Jintao. Other Americans warn the president not to go so far that he causes a trade war. NPR's Adam Davidson has a primer on the sometimes conflicting views of trade between the United States and China.

Who is angry at China and why?

Probably the strongest critics of China are owners and workers at small U.S. manufacturing plants. These people make everything from plastic bottle tops to car parts. Many find that Chinese competition is dramatically hurting their business. Chinese-made goods are often sold in the United States for far less than what American manufacturers charge.

How can China afford to undersell U.S. manufacturers?

The main reason is that labor costs are much, much lower in China. Beyond that, many economists believe that the Chinese government keeps its currency artificially cheap by pegging the value of the yuan to the U.S. dollar. Some U.S. manufacturers argue that this keeps the price of Chinese-made products lower than they otherwise would be.

Who benefits from the current trade with China?

Retailers would argue that all Americans benefit. Chinese exports are generally cheaper than U.S.-made equivalents. Prices on many consumer products — such as clothes and electronics and car parts — have dropped because Chinese factories make them for a lot less. This means more money in Americans' pockets and higher profits for retailers. And of course, the more Chinese goods that American consumers buy, the more the Chinese economy grows.

Does trade with China offer U.S. manufacturers any advantages?

Many larger U.S. manufacturers take advantage of China's low production costs. Some firms such as Nike and other apparel companies make most of their products in China or other low-cost countries and then import them to the United States. Others, such as General Motors and Intel, have complex supply chains in which some of their products are made in the United States using components that were manufactured in China. They, too, are able to cut cost through trade with China.

So, who is right? Does trade with China hurt the U.S. economy or help it?

As with most economic issues, the answer is that some in the United States are hurt while others are helped. The pain is generally felt intensely by relatively small and specific groups of people, like laid-off textile workers. The benefits are spread diffusely across the entire population, in things like discounts on a broad range of consumer goods. As a general rule, the lower a person's education level, the more likely they are to be laid off or suffer pay cuts because of trade with China. Entire industries that rely on low-skill workers have been all but destroyed by Chinese competition. There are few companies left in the United States that make plush toys or clothes or plastic cooking utensils. Higher-skill manufacturing, such as precision aircraft parts or medical devices, have so far been spared the worst impacts of competition with China.

What kind of concessions do critics want from China?

No one is calling to stop all trade with China. But leading domestic manufacturing and labor voices say free trade with China has to be fair trade. Critics argue that China doesn't play fair because it ignores international trade rules on copyrights and trademarks. Pirated versions of everything from toothpaste to motorcycles to software are readily and cheaply available on the streets of China. U.S. firms argue that this costs them billions of dollars in lost revenue each year; they want China to step up enforcement of copyright protections.

The U.S. government has repeatedly called on China to change the way the yuan is valued so that it is more responsive to market changes. Most multinational corporations also want the Chinese government to ease restrictions on foreign investment. Large U.S. financial institutions, for example, want to be able to sell their products to Chinese consumers just like Chinese manufacturers sell their products to Americans. U.S. industries also want a crackdown on corruption, legal reforms and fewer government subsidies for Chinese manufacturers.

What does the future hold for China and the United States?

Many economists say things are much better for the United States than the average person might imagine. The United States still has the world's largest economy and is the world's biggest manufacturer. It will most likely take China decades of continued aggressive growth to unseat the United States. The United States is even farther ahead of China in the non-manufacturing sector. America has far better developed financial and legal systems. The United States is the world leader in innovation, especially in high-value industries such as aerospace, medical-device and precision-equipment manufacturing. These economists argue that the United States can continue as the world's strongest economy indefinitely, so long as U.S. workers and companies focus on high-skill, high-value products. Of course, this is little comfort to someone who has lost a job and sees little or no opportunity for a new one.

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